The consequences of Covid-19 have had disastrous impacts on business globally, with many being left in significant financial distress. Chapter 6 of the Companies Act No 71 of 2008 has introduced a remedy for businesses when in financial distress before placing the company in liquidation. This remedy is known as business rescue proceedings.
What is business rescue?
By implementing business rescue proceedings, companies can restructure their business to see their financial affairs taking a turn for the better. Essentially, business rescue aims to either ensure that the company continues to trade, alternatively should the proceedings fail, that the creditors would receive a higher return than what they would have received had the company been placed under liquidation. The commencement of business rescue proceedings thus provide for the following: -
- The temporary supervision by a business rescue practitioner of the company and the management of its affairs;
- A temporary moratorium on the rights of claimants against the company; and
- The development and implementation of a business rescue plan that aims to restructure the company in its entirety.
- Thus, business rescue is seen as a last-ditch attempt at turning the company around before instituting liquidation proceedings.
So how do you know whether your company can be placed under business rescue?
A company may be placed in business rescue if it is financially distressed. In terms of the Companies Act, a company is deemed to be financially distressed when: -
- It appears that the company is reasonably unlikely to be able to pay all of its debts as and when they become due and payable, within the immediately ensuing six months after the determination; or
- It appears that the company is reasonably likely to become insolvent within the immediately ensuing six months.
When is a company placed under business rescue?
There are two instances wherein a company has been placed in business rescue. The first instance is when the company's board of directors has resolved that the company voluntarily institute the proceedings. The second instance is when an affected person (as defined by the Act) makes a formal application to the court to place the company under business rescue. Once the company has been placed under business rescue proceedings, the appointed business rescue practitioner must investigate the company’s affairs and convene a meeting of the creditors and employees within ten days after having been appointed. The business rescue practitioner must also ensure that the business rescue plan is published within twenty-five days after appointment.
Business rescue proceedings are often the more desired approach for companies, as they would prefer to make every attempt at saving the company before it's winding up. However, it is essential to consider whether the proceedings are likely to succeed. In doing so, careful consideration must be given to the nature of the company. Should it appear that the same result is expected to be achieved by placing the company in liquidation, it is advisable to not proceed with business rescue proceedings. If the nature of your company's business is such that a restructure will yield a turn in the company's solvency and yield a higher result for your creditors, then these proceedings are advisable.
At SchoemanLaw, our focus is on ensuring your company is provided with the best tailor-made advice. Contact an expert at SchoemanLaw for any of your commercial needs.
Written by Gabriella Keeble, Candidate Attorney, Schoeman Law